10/05/2012 01:47 pm ET Updated Dec 05, 2012

Unemployment Rate Falls Below 8 Percent for First Time Since January 2009

The impression of the U.S. labour market has improved substantially with the latest jobs market data for September. Employment according to the non-farm payrolls measure rose by 114,000 over the month and jobs growth for previous months was revised upwards too. This was enough to produce a sharp fall in the unemployment rate from 8.1 percent in August to 7.8 percent in September. A year earlier, unemployment had stood at 9 percent, but the unemployment rate has now moved below 8 percent for the first time in 43 months.

The moderate rate of jobs growth in the non-farm payrolls survey in September would not ordinarily be expected to cause such a large fall in the unemployment rate, as the U.S. needs around 100,000 new jobs per month just to keep up with growth in the labour force. A separate labour market measure, the household survey, recorded a much stronger rise in employment, of 870,000. Both surveys provide pointers towards the underlying employment situation: the divergence suggests that the non-farm payrolls report may well be understating the actual employment gains for September. A significant increase in the number of part-time workers, which rose by 306,000 month on month, was also a major contributor to the fall in unemployment. Within this category, there was a large share of jobs growth for workers who would prefer a full-time job, but could not obtain one, reflecting the fact that the labour market is still on the mend.

The labour market's performance in the third quarter now also looks better than previously believed, thanks to upward revisions for jobs growth for July and August. Growth in non-farm payrolls is now estimated at 142,000 in August and 181,000 in July. Consumer confidence and retail sales trends, as well as buoyant car sales, had all suggested a stronger consumer performance than the original jobs numbers had implied, so the latest employment revisions confirm the impression of a steadily improving labour market in the third quarter. This contrasts with the second-quarter outcome, when monthly average growth in non-farm payrolls was just 66,000.

The jobs data is not positive across the board, however. Manufacturing employment fell back for the second successive month, a development that had been presaged by weak readings for new orders in recent months. By contrast, it seems the trend in government employment turned around in the third quarter. Public employment had acted as a drag on the labour market for two years, but stabilised and even increased slightly in third quarter. In the medium term, however, the outlook for government employment is still negative, as the federal government moves towards further fiscal consolidation in 2013 and beyond.

The fall in the unemployment rate to below 8 percent comes at a particularly fortuitous time for the president, Barack Obama, whose performance in the first presidential debate on October 3rd was underwhelming. He can now use the September data as a counterpoint to accusations from his Republican opponent, Mitt Romney, that the economy has performed badly under the president's stewardship. The weak labour market and slow economic recovery have long been the most potent obstacles to his re-election.

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